Friday, January 27, 2017

Remember first that many advocates of NAFTA made at the outset some
wildly optimistic claims about what NAFTA was going to achieve. The most
extravagant of the studies, and the one that probably was the most
widely circulated, was one produced at the Peterson Institute for
International Economics (then just the Institute for International
Economics). This study argued that NAFTA would be a net job creator for
the U.S., thanks to a projected improvement in the U.S. balance of
trade.(...)

This argument was always a red herring: trade agreements are not
supposed to create net employment; they simply reshuffle employment.
NAFTA neither subtracted, nor added substantial number of jobs to the
U.S. economy. At best, it made the U.S. economy more efficient by
reallocating workers to jobs that are more productive.

And certainly this happened. But the overall efficiency gains are
quite small, much smaller than what the trade volume effects would lead
you to believe. A recently published academic study by Lorenzo Caliendo and Fernando Parro
uses all the bells-and-whistles of modern trade theory to produce the
estimate that these overall gains amount to a “welfare” gain of 0.08%
for the U.S. That is, eight-hundredth of 1 percent! (...)

A gain, no matter how small, is still a gain. What about the distributional impacts?

The most detailed empirical analysis of the labor-market effects of NAFTA is contained in a paper by John McLaren and Shushanik Hakobyan.
They find that the aggregate effects were rather small (in line with
other work), but that impacts on directly affected communities were
quite severe. (...)

In other words, those high school dropouts who worked in industries
protected by tariffs prior to NAFTA experienced reductions in wage
growth by as much as 17 percentage points relative to
wage growth in unaffected industries. I don’t think anyone can argue
that a 17 percentage drop is small. As McLaren and Hakobyan emphasize,
these losses were then propagated throughout the localities in which
these workers lived.

So here is the overall picture that these academic studies
paint for the U.S.: NAFTA produced large changes in trade volumes, tiny
efficiency gains overall, and some very significant impacts on adversely
affected communities.(...)

So is Trump deluded on NAFTA’s overall impact on manufacturing jobs? Absolutely, yes.

Was he able to capitalize on the very real losses that this and other
trade agreements produced in certain parts of the country in a way that
Democrats were unable to? Again, yes.